One of our recent newsletters briefly discussed due diligence. As it only provided basic facts, let’s have a closer look at what due diligence can be used for.
- Buying or selling. Last time, we used this example to briefly describe how due diligence is carried out. In our practice, it is the most frequent circumstance in which due diligence is demanded by our clients. And we are glad, because in the context of a company sale or purchase, due diligence increases the client’s awareness, and this facilitates decision-making and reduces risks. Last but not least, it can serve to identify potential for future improvements (after the takeover) and hence increase competitiveness.
- Due diligence need not always involve a share deal (an entire business being sold/purchased); it can only involve assets currently held by a company (asset deal).
- Financing. Due diligence can be one of the conditions required by the financing company for providing funds (such as for refinancing or investing). It is understandable that the financing partner wants to be assured that it is safe to finance this or other activities of its client or a potential client. Possible risks may be highlighted in the due diligence report.
- Verification. An example: the state administration verifies whether funds entrusted to an organisation financed by the government are managed properly and not wasted or spent on other activities for which the organisation has not been established.
If you think that your transaction is not big enough for due diligence, be careful. You yourself can define the scope of the analysed facts and considerably influence the costs of the project. As Monika Marečková, Managing Partner of RSM CZ, said in a recent M&A seminar, due diligence reports have changed: they are shorter and focus mainly on risk areas.
Due diligence cannot be carried out as a matter of routine. Each exercise requires an individual approach focused mainly on the client’s needs. This process is not often easy, and in such a case, clear communication is key to success – between the adviser and the target company as well as between the adviser and the client.
Next time, we will look at the due diligence process from a different perspective. If you wish to meet and discuss this topic in person, please register and come to a Due Diligence 2015 breakfast which will be held in June as part of the Spring Business Breakfasts series.
Please do not hesitate to contact us if you have any questions regarding due diligence or if you are interested in our services.